The controlling shareholders of Quintiles, a group that includes executive chairman and co-founder Dennis Gillings, are in line to share a $25 million one-time payment when the worlds largest pharmaceutical services company goes public.
The payment, outlined in the Durham-based companys latest filing with the Securities and Exchange Commission, is a termination fee that aims to compensate Gillings and the other shareholders for halting management service fees totaling at least $5 million a year that they have shared since 2008. When Quintiles disclosed its plans for an initial public offering in February it indicated it planned to pay such a termination fee but didnt specify the amount.
The $25 million termination fee stems from an agreement with Gillings and the private equity firms that control the business, according to the latest filing. The Gillings family and four firms Bain Capital, TPG Capital, Temasek and 3i Corp. collectively own more than 90 percent of the companys stock today and will continue to own a controlling stake in the business post-IPO.
The latest SEC filing doesnt specify precisely how the $25 million termination fee would be shared, but it would presumably be similar to the split of the annual management fee. That fee is split, for the most part, based on the size of the shareholders ownership stakes. Gillings and his family own 23.7 percent of the business.
Its fairly typical in the private equity industry for owners to receive a termination fee when a company goes public and the annual management consulting fees stop.
The consulting fees
Public companies dont pay consulting fees to private equity firms, said Andy Silton, a retired money manager, former chief investment adviser for the North Carolina state pension fund and the author of a blog called Meditations on Money Management.
The size of the Quintiles termination fee is also typical for the private equity industry, Silton said. But he questioned what the large shareholders are doing to earn the consulting fees above and beyond the fees the firms already receive from their own investors.
It is kind of outrageous, even if it is customary, that money managers of private equity firms are able to charge consulting fees to the companies they control, he said.
Quintiles was publicly traded from 1994 to 2003, when it went private in a leveraged buyout led by Gillings, who was CEO at the time.
Quintiles spokesman Phil Bridges said the company couldnt comment on its SEC filing given the regulatory restrictions placed on companies that are planning an IPO.
IPO to help pay debt
Quintiles hopes to raise $600 million from investors by going public but hasnt yet set a target price for its shares or disclosed how large of a stake in the business it plans to sell to raise that money. An analyst at credit rating firm Moodys, Jessica Gladstone, has estimated that Quintiles investment bankers are valuing the company at roughly $4 billion.
Quintiles generated $3.7 billion in revenue last year, up 12.1 percent from 2011, and posted net income of $177.5 million. It has more than 2,000 employees in the Triangle and 27,000 worldwide. The company is best-known for helping pharmaceutical and biotechnology companies test experimental drugs.
The management fees Quintiles has been paying top shareholders came on top of $1.5 billion in dividends that shareholders have received since 2008 including $567.9 million last year. Much of that money was borrowed, pushing the companys debt to $2.4 billion.
Quintiles intends to use part of the proceeds from its IPO to pay off a $300 million loan.